The Euro: Past, Present and Future

Presentation at the ConferenceTwenty Years Treaty on European Union: Reflections from Maastricht

Maastricht, 25 October 2013by

Professor Dr. René SmitsJean Monnet Chair, Law of Economic and Monetary Union,

University of AmsterdamLegal Consultant, RS Law & Society Consulting B.V.

Assessor, Belgian Competition Authority

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Overview

1. Introduction2. Past: weaknesses / failures3. Present: Restoring these deficiencies now4. Future

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Introduction

• Single currency part of a political project for Europe: peace, prosperity, freedom

• Euro is supposed to unite but, currently, the currency divides • Plight of the unemployed, pensioners and all others who

suffer under combined effect of structural measures and budget tightening (austerity)

• Cultural aspect central

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Imbalance between the economic and monetary pillars of EMU

eMU25 October 2013 © René Smits 2013 4

Market thinking of the 1980s

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Trilemma in financial supervision

© Dirk Schoenmaker, 2005

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Single Euro Payments Area

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Cultural aspect of the single currency

« La monnaie a une dimension sociale: elle constitue une abstraction et un signe (…) la monnaie n’est pas, en premier lieu, une innovation économique mais l’expression d’un vivre ensemble. »

Michel Dévoluy, L’euro est-il un échec ?, Paris, 2012

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Three elements of ‘banking union’

1. Single Supervisory Mechanism (‘SSM’: ECB + National Supervisory Authorities) – regulations approved by Parliament and Ecofin Council

2. Single Resolution Mechanism (proposal in legislative process)

3. Single Deposit Guarantee System (no proposal yet)

4. Single Rule Book(CRD IV and CRR)

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‘Bail-in’ of creditors (not: covered depositors)

Agreement by Euro Area Member States on direct recapitalisation instrument of the ESM

Bank Recovery & Resoltion Directive, political agreement in Ecofin Commission’s proposal for a Regulation establishing a Euro Area-

wide Single Resolution Mechanism Commission’s Banking Communication 2013 (Commission approach

to restructuring of banks that receive state aid, effective 1 August 2013) To shift burden from taxpayers to creditors (moral hazard) Wisdom questioned (Mario Draghi, leaked letter, July 2013; ‘Bail-ins are no

better than fool’s gold’, Avinash Persaud, FT, 21 October 2013) : fear of market disturbance

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Comprehensive assessment of systemically important banks

Announced by ECB on 23 October 2013 ‘Essential preparation for SSM’ To provide necessary clarity on banks: Transparency on condition of Euro Areas’s systemically important banks Repair of banks' conditions through corrective actions Confidence building ECB to conduct, NCAs to execute assessment Capital shortfall to be remedied first from private sources but

public backstops needed - reference to European Council conclusions that States will make “all appropriate arrangements, including the establishment of national backstops, ahead of the completion of [the comprehensive assessment]”

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‘Six-pack’Adopted in November 2011:• Directive 2011/85/EU on requirements for budgetary frameworks of the

Member States

• Regulation No 1176/2011 on the prevention and correction of macroeconomic imbalances

• Regulation No 1174/2011 on enforcement measures to correct excessive macroeconomic imbalances in the euro area

• Regulation No 1175/2011 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies – amending Reg. 1466/67 (preventive arm of SGP)

• Regulation No 1177/2011 on speeding up and clarifying the implementation of the excessive deficit procedure – amending Reg. 1467/97 (corrective arm of SGP)

• Regulation No 1173/2011 on the effective enforcement of budgetary surveillance in the euro area

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‘Duo-pack’

Adopted in May 2013:

o Regulation No 473/2013 on monitoring and assessing draft budgets and ensuring correction of excessive deficits of the Member States in the euro area

o Regulation No 472/2013 on strengthening of economic and budgetary surveillance of Member States n the euro area experiencing or threatened with serious difficulties with respect to their financial stability

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Impact of the ‘packs’

1. Stricter budgetary surveillance2. Renewed emphasis on debt criterion3. Numerical precision in progress towards

sustainable public finances4. Much stricter enforcement for euro area MS5. Reliance on financial sanctions in enforcement6. Independence and reliability of statistics7. Wider scope of surveillance from Brussels

(economic imbalances), with € area enforcement

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<Fiscal compact treaty>: overview

• International treaty next to TFEU among 25• 95% already (to be) adopted under six-pack or duo-pack (Olli

Rehn, seminar before ALDE, European Parliament, 10/01/12)• New elements: constitutional debt brake & automatic sanctions…• …+ decision that MS has excessive deficit also by reversed QMV• Budgetary position in balance or surplus (structural deficit < 0.5%)• Benchmark debt reduction: 1/20th per annum of excess > 60%• Ex ante reporting on public debt issuance (Eurobonds precursor?)• Commitment to endorse Commission unless QM is against• “undertake to work jointly towards an economic policy”• ECJ to rule on consistency of national law with balanced budget

requirement and automatic correction mechanism under treaty

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<Fiscal compact>: economic governance

o Euro Summit meetings: Heads of State or Government euro area + Commission President, ECB President observer

o President of Euro Summit appointed by simple majority at same time as European Council President

o Twice yearly meetings at leasto <outs> that ratified TSCG invited subject-specific and once

a year; other <outs> ‘closely informed’o European Parliament involved // conference of committees

of EP and national parliaments of TSCG parties

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European Stability Mechanism

Pringle v IrelandCase C-370/12, European Court of Justice27 November 2012

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ECB’s OMT

o Outright transactions in secondary sovereign bond marketso Announced 6 September 2012o “strict and effective conditionality attached to an appropriate

EFSF/ESM programme” o Aim:

o “to safeguard the monetary policy transmission mechanism in all [States] of the euro area.”

o “to preserve the singleness of our monetary policy and to ensure the proper transmission of our policy stance to the real economy throughout the area.”

o “to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro.”

"Within our mandate,the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough." London, 26 July 2012

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General observations

• Peculiar interplay between intergovernmental progress and EU law-based efforts

• Role of Member States strengthened in discussions: banking union, economic dialogue, fiscal compact assembly

• Role of Commission strengthened• Role of European Parliament strengthened even

though ‘Lisbon’ weakened it in respect of 127 (6) TFEU: mere consultation whilst assent had been required.

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Jointly beating the markets

• Eurobonds: issuing debt jointly can be undertaken in a manner that reinforces (credibility of) conditionality and budgetary rules

• Joint assessment of creditworthiness of sovereign risk (banking supervision)

• Sovereign Debt Restructuring Mechanism for Member States

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Towards a ‘Genuine EMU’

• An economic government for Europe > automatic stabilisers through EU-funding of national unemployment benefits:

• Glienicker Group call, Die Zeit, 17 October 2013• Interparliamentary Conference on Economic and Financial

Governance of the EU, Vilnius (LT), 16-17 October 2013 [based on Article 13 TSCG]

• Single external representation in IMF, G8/G20, et cetera (IMF role in troika)

• True democratic deficit: that markets (banks, credit rating agencies, hedge funds) and media determine more what happens in the Union than its (directly or indirectly elected) politicians

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Relativity of the crisis

• Raghuram Rajan, May 2013 in Het Financieele Dagblad : “I would swap India’s growth levels at any moment for the level of wealth in Europe”

• 40% of mankind lives on less than $2 per day

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European dream has a universal vocation

“We are part of the whole which we call the universe, but it is an optical delusion of our mind that we think we are separate. This separateness is like a prison for us. Our job is to widen the circle of compassion so we feel connected to all people and all situations.”

Albert Einstein (1879-1955)

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